Equity Analysis /
Saudi Arabia

Mobily: Return to profits, upgrade to Neutral (PT: 20.9)

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Head of Equity Research

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    SNB Capital
    17 December 2019
    Published bySNB Capital

    We upgrade Mobily from Underweight to Neutral with a PT of SAR20.9. We believe the growth in revenues and expansion in margins more than offset the negative impact of the revision in royalty fees, resulting in the first net profit since 2013. Going forward, we expect growth in the telecom sector to be driven by Ministry of Telecommunication’s ICT 2023 strategy and the launch of 5G. Therefore, we expect Mobily to report a net income of SAR383mn in 2020f (+65.5% yoy). The stock is trading at 2020f EV/EBITDA of 4.6x and PE of 45.6x. This compares to the peer group average of 6.2x and 14.9x, respectively. 

    ICT 2023 strategy to drive the sector: The telecom sector is one of the key pillars to achieve Vision 2030 goals, as it play a pivotal role as an enabler for various programs. The Ministry of Telecommunication has launched its ICT 2019-2023 strategy recently which is built on three pillars: 1) improve the effectiveness of the telecoms market, 2) increase local content, and 3) grow IT and emerging technologies. These pillars lead to 13 priorities including: increase the level of competition in the market, enhance fixed and mobile markets, ensure the readiness of infrastructure, enable the development of mega projects and increase the share of local content. We believe this strategy is providing more clarity and stability for the sector over the medium term as it enables companies to better plan and focus on key targets. The strategy is expected to be the main growth driver for the sector. 

    5G race begun: Despite the limited available devices and usage of the technology, Saudi operators started to offer 5G services during H2 19, which we believe could lead to a change in operators positioning and market shares. STC launched its services at limited locations, Zain outpaced with a network of 2,600 towers across 27 cities in Saudi, while Mobily has been lagging slightly behind. Although it’s too early to conclude on the main beneficiaries, we believe that the faster coverage rollout of Zain may give it head start among its peers. Moreover, we expect capex levels to increase further going forward. We expect Mobily to increase its capex to SAR2.8bn in 2020f from SAR2.1bn in 2019f, which represents a capex/revenue ratio of 20%.